Despite broader macroeconomic headwinds, Legal & General’s CEO Nigel Wilson (pictured) believes the group’s exposure to inflation is minimal. Following its full-year results — when it exceeded £2bn in profit for the first time — market expectations for the group is that it will likely post another promising update in its half-yearly trading statement on 9 August. The company remains confident that it is on track to achieve its targets.
Legal & General [LGEN.L] — one of the biggest life insurance and asset management companies in the UK — has established itself as one of the top dividend-paying FTSE 100 stocks over the past five years. Between 2015 and 2022, the group’s dividend has been raised by a total of more than 50%. The stock has also performed relatively well, up 36.8% over the past five years and 5% over the past 12 months to close at 266.5p on 5 August.
While the stock has seen a similar rise in the year-to-date, the financial services group has been facing a pressured macro environment amid extremely high interest rates and rising inflation. These factors could have a slight negative effect on Legal & General’s upcoming half-year trading update on 9 August. However, if the group can demonstrate resilience in the face of these uncertainties, the stock could soar as a result.
Profits exceed £2bn in 2021
In its full-year 2021 earnings, Legal & General was able to deliver very strong results. Profit after tax exceeded £2bn for the first time in its history and was up 28% year-over-year. At the same time, earnings per share reached 34.19p, up 72% from 2020 and up 19% from 2019. Key drivers of growth included the insurance segment and the capital sector.
The company also delivered strong forward guidance, which bodes well for the upcoming half-year trading update. Indeed, for the next five years, the asset management and insurance group expects cash and capital generation of between £8bn and £9bn, while dividends are expected to total between £5.6bn and £5.9bn. This means that shareholders can expect both growth in the company’s profits and the dividend in the upcoming trading update.
In the recent trading statement on 7 July, the company also reaffirmed that its performance was on track. Therefore, it expects to deliver double-digit growth in both cash and capital generation in the first half of the year. At the same time, as of 30 June, the company’s solvency ratio was 215%, up from 187% at the end of December 2021. This is a key sign of financial strength for the group and, as CEO Nigel Wilson states, “it provides further security and optionality”.
Analysts highlight credit risk in fixed income
There are some worrying factors for Legal & General, however. For instance, as highlighted by Jefferies in a recent research note, there is investor concern about credit risk in the insurer’s fixed income portfolio, Reuters reported. At the same time, a recession could have a negative effect on the group, due to a downturn in its asset management sector.
Even so, as Nigel Wilson highlights, Legal & General is still very well positioned for future growth. This is because it is “closely aligned to long-term structural growth drivers such as ageing demographics, investing in the real economy and addressing climate change – both in the UK and, more recently, in the US”. In particular, an ageing population should benefit the company’s retirement solutions sector, which accounted for around 43% of the group’s operating profits in 2021.
He also stated that the company’s overall exposure to inflation is minimal, while its total exposure to Russia accounted for only 0.1% of assets under management, according to a statement issued by the company in March. This means that the negative effect from these factors in the upcoming half-year update should be limited.
Despite the challenges ahead, analysts are fairly confident about the future for the company in light of its recent performance. According to MarketBeat, Legal & General shares have four ‘buy’ ratings and two ‘hold’ ratings. With an average price target of 340p, this implies an upside potential of 27.6% from its 5 August closing price.
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